Cash may not be the most exciting asset class, but it’s essential. Cash is an alternative investment that not enough people are talking about. In today’s market environment, with interest rates rising and high volatility, cash can provide a safe haven for investors. However, many financial advisors may not be eager to recommend it if they aren’t receiving commissions or fees. Here’s why you should consider cash in your portfolio.
First, let’s define what we mean by cash. Cash refers to any money readily available for spending or investing, including savings accounts, money market accounts, and shorter-term certificates of deposit (CDs). These types of accounts typically offer lower returns than other asset classes, such as stocks or bonds, but they also come with lower risk and increased liquidity.
How much is out there?
The Investment Company Institute (ICI) is the national association of US investment companies and includes mutual funds, exchange-traded funds (ETFs), closed-end funds, and unit investment trusts. According to the ICI, the total money market fund assets increased by $30.28 billion to $5.28 trillion for the week ending on Wednesday, April 12. Among taxable money market funds, government funds2 increased by $26.75 billion, and prime funds increased by $3.33 billion. In addition, tax-exempt money market funds increased by $198 million.
Benefits of Cash
One of the most significant benefits of cash is its liquidity. Unlike other asset classes, cash can be easily accessed and used for any purpose, such as emergency funds or short-term investments. In addition, liquidity makes it a valuable part of any diversified portfolio.
Another benefit of cash is its stability. While other asset classes can experience significant volatility and fluctuations in value, cash is generally stable and reliable. Stability can provide a sense of security for investors during periods of market turmoil and “dry powder” to take advantage of market dislocations and buying opportunities.
We see what other advisors do when people come in for our Second Opinion Service (SOS) review. How little cash people have on their balance sheets amazes my team and me. So why might your financial advisor not suggest cash as an asset class? One reason could be that cash doesn’t generate commissions or fees for advisors. Financial advisors typically earn money through commissions on products such as stocks, bonds, mutual funds, or ongoing fees for managing clients’ portfolios. Since cash doesn’t generate commissions or fees, advisors may be less eager to recommend it to their clients.
Another reason advisors may hesitate to recommend cash is that some view it as a passive investment strategy. Unlike actively managed mutual funds or individual stocks, cash doesn’t require much ongoing management or analysis. Many advisors prefer to actively manage their clients’ portfolios.
While it may not generate commissions or need ongoing management, it shouldn’t be overlooked. In today’s market, cash can provide a valuable source of stability and safety. In addition, it can serve as a hedge against market volatility.
The most significant benefit of having a cash reserve in your portfolio is to have money to take advantage of opportunities. Cash can provide flexibility and the ability to take advantage of opportunities that may arise in the market. For example, having cash on hand during a market downturn can allow an investor to purchase undervalued assets at a discount.
Interest Rates Are Now In Your Favor
As you may have noticed, interest rates have increased. As a result, most banks (and Internet banks) are starting to pay better interest rates on deposits. We have seen cash accounts paying 4% or more, and many money market accounts also paying 4 percent. The increasing interest rates allow less of a downside to holding cash. Justifying a large cash holding “back in the day” of .5 percent rates was challenging. Based on recent outlooks, the FED could still have several interest rate hikes, which will trickle down to higher paying rates on cash.
Incorporate Into Your Investment Strategy
How can investors incorporate cash into their portfolios? One approach is to use a “core and satellite” strategy. The core portion of the portfolio is invested in low-cost index funds or ETFs that provide exposure to a broad range of asset classes, such as stocks and bonds. The satellite portion is then invested in alternative asset classes, such as cash, real estate, or commodities, that can provide additional diversification and stability.
Another approach is to use cash as a strategic asset allocation. Strategic asset allocation means setting aside a certain percentage of the portfolio in cash, such as 10-20 percent, and holding it for the long term. It can provide a valuable stability source during market volatility and be used for short-term investments or emergency funds.
If you are working with an advisor, ask them what their highest paying (to you) cash account is and request to increase that exposure. It should encourage you to know that most private equity funds are sitting on the largest allocation of cash in history, which is a sign they may be waiting for things to “go on sale” and scoop them up.
By incorporating cash into your portfolio, you can build a diversified and resilient investment strategy that can better weather the ups and downs of the market.
Learn more at Forbes.
Frederick Hubler is the founder and CEO of Creative Capital Wealth Management Group, a retainer-based wealth strategy firm specializing in alternative strategies located in Chester County, PA.
Securities are offered through Arkadios Capital. Member FINRA/SIPC. Advisory services are offered through Creative Capital Wealth Management Group. Creative Capital Wealth Management Group and Arkadios are not affiliated through any ownership.
This material was created for educational and informational purposes only and is not intended as tax, legal, or investment advice.